Consumer staples conglomerate PepsiCo (NASDAQ:PEP) continues to defy gravity in fiscal 2019 -- at least its sales continue to do so. For a consumer packaged goods (CPG) leader, "gravity" can be loosely defined as annual organic revenue growth of 1 to 2 percentage points -- that's the level of expansion most of PepsiCo's peers have been confined to over the last few years.

In fiscal 2019, PepsiCo has averaged 4% organic top-line growth and revealed as much for the third quarter in results released Thursday before the markets opened. Investors were suitably impressed, bidding up shares by roughly 4% by midday, despite a volatile session for major stock market averages. As we review the last three months below, note that all comparative numbers refer to the prior-year quarter.

Here's a snapshot of the third quarter:

Metric Q3 2019 Q3 2018 Change
Revenue $17.20 billion $16.49 billion 4.3%
Net income $2.10 billion $2.49 billion (15.6%)
Diluted EPS $1.49 $1.75 (14.9%)

Data source: PepsiCo. EPS = earnings per share.

Highlights of the last three months

  • Organic revenue (reported revenue adjusted for foreign currency translation and the effects of acquisitions and divestitures) expanded by 4.3%, the same amount as reported revenue, as a 1% drag from foreign currency was offset by a 1% benefit from acquisitions and divestitures.
  • The company's revenue advance was derived entirely from pricing -- consolidated volumes were flat against the prior year.
  • Frito-Lay North America (FLNA) again paced performance for the entire company. FLNA chalked up a 2% improvement in volume and added 3.5% of favorable pricing leverage for a total segment revenue gain of 5.5%, to $4.1 billion.
  • PepsiCo Beverages North America (PBNA) reported a top-line advance of 3.5%, to $5.6 billion. Pricing gains were offset by 1 percentage point of foreign currency translation and 1 percentage point of volume decline.
  • Among PepsiCo's smaller segments, Latin America and Europe Sub Saharan Africa (ESSA) both notched 4% organic revenue growth. Asia, Middle East and North Africa (AMENA) achieved a notable 9% advance in organic revenue. The company's smallest business division, Quaker Foods North America (QFNA), continued to trail consolidated results, with a top-line organic improvement of just 1%.
  • PepsiCo's gross margin improved by 90 basis points to 55.2%. However, slightly higher selling, general, and administrative expenses (SG&A), coupled with income tax expense that exceeded the prior-year quarter's total by $371 million, combined to push net income and EPS lower against the comparable period, as seen in the table above.
  • The organization repurchased $542 million of its common stock during the quarter; total year-to-date purchases now stand at $2.3 billion, approaching management's fiscal 2019 goal of $3 billion in stock buybacks with one quarter remaining in the year.
Colorful rows of soft drink bottles.

Image source: Getty Images.

Management's thoughts and outlook

Backed by strong results, CEO Ramon Laguarta conveyed optimism to shareholders in the company's earnings press release as he looked to the upcoming quarters. In addition to PepsiCo's strategic pricing, Laguarta outlined other factors behind the company's sales and earnings momentum:

We are pleased with our results for the third quarter. While adverse foreign exchange translation negatively impacted reported net revenue performance, organic revenue growth was 4.3% in the quarter. We are making good progress against our strategic priorities and our businesses are performing well as we continue to make the necessary investments in our capabilities, brands, manufacturing and go-to-market capacity to propel our future growth. Given our performance year-to-date, we now expect to meet or exceed our full-year organic revenue growth target of 4%.

As for the full-year target Laguarta mentions, PepsiCo is coasting along after three quarters, having booked an organic revenue growth rate of 4.6% against the comparable period in fiscal 2018. Thus, the organization simply needs to maintain current performance to finish at 4%-plus for the year.

Other outlook items remain unchanged. PepsiCo is expecting a 1% dip in core diluted EPS in fiscal 2020. The projected EPS of $5.50 will represent a 3% decline against the $5.66 in core diluted EPS booked last year.

Similarly, the company still expects to meet its full-year cash flow generation goals, which call for ample cash from operations of $9 billion, and free cash flow of $4.5 billion. All of this free cash flow will be returned to shareholders to meet a year-end target of $8 billion allocated between dividends and share repurchases. So far, investors have warmed to an equation of revenue growth alongside healthy shareholder returns: PepsiCo's stock is up nearly 30% year to date on a total return basis.